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WASHINGTON, DC-In a report to the US Congress, the “President’s Working Group on Financial Markets” validates GAO findings about long-term availability and affordability of terrorism insurance. Congress and the real estate and insurance industries have been waiting for the report as part of the due diligence for crafting a permanent solution to the Terrorism Risk Insurance Act, extended for two years in December 2005.

But if these stakeholders were hoping for a definitive answer, the report does not deliver. It notes, for instance, that the insurance sector has improved the methods to support terrorism risk modeling and has made great strides in measuring and managing risk accumulations. The report goes on to lend credence to insurers’ concerns–namely that the modeling strategies are based relies largely on analysis of terrorist behavior. “Given the uncertainty of terrorism in general and, in particular, the uncertainty associated with these modeling efforts, insurers appear to have limited confidence in these models for evaluating their risk exposures,” the report said.

Another issue the report tackles is the demand for terrorism insurance, which has been lower than expected, given the reasonable rates in the market. This is another challenge for insurers, who are not likely to develop, price and reserve the necessary capital to support such policies without a corresponding demand for them.

“It is unclear why approximately 40% of all policyholders do not purchase coverage, although the Treasury’s 2005 study and others have found that the primary reasons were price and assessment of their individual risk to terrorist attack,” the report said.

The combination of these two factors–the difficulty of predicting a terrorist event and the low demand for policies–lead the report’s authors to conclude that predicting the potential degree of long-term development of the terrorism risk insurance market is still “somewhat difficult.”

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